Latest / The College Savings Podcast with Fexingo: 529 Plans, Education Funding, and Student Costs / Why 529 Plans Are a Roth IRA Rollover Option in 2026
Transcript
- Lucas: Imagine you saved diligently in a 529 plan for your child, and now they graduate college with money left over. Instead of taking a penalty or changing the beneficiary to a cousin, there is a way to move that unused cash into a Roth IRA — for the same child. Luna: That is the SECURE 2.0 provision that kicked in last year. It is one of the most practical changes to 529 plans in a long time. Lucas: Exactly. If our money conversations have helped you think about a decision differently, honestly, if today was worth a coffee to you, that is the link — buy me a coffee dot com slash fexingo. It keeps the show ad-free and independent. Luna: And we genuinely mean the smallest possible ask. A coffee's worth. Now, back to that rollover — it is not unlimited. There are specific rules. Lucas: Right. The rollover is subject to three big constraints. First, the 529 account must have been open for at least 15 years. Second, the lifetime maximum you can roll over per beneficiary is $35,000. And third, the rollover counts toward the beneficiary's annual Roth IRA contribution limit — currently $7,000 for 2026, or $8,000 if they are fifty or older, but since we are talking about a child, likely $7,000. Luna: So you cannot dump $35,000 in one year. You have to spread it out over several years, up to the annual contribution cap. Lucas: That is correct. And there is one more nuance: any contributions to the 529 in the last 5 years are not eligible for rollover. So if you added money in 2025, that portion cannot be rolled until 2030. Luna: Let's use a concrete example. Say your child finished college in May 2026, and there is $40,000 left in the 529. The account was opened in 2008 — so more than 15 years. You can roll over $7,000 this year, another $7,000 next year, and so on, until you hit the $35,000 cap. Lucas: That is exactly how it works. And the rolled-over amount is treated as a regular Roth contribution — it grows tax-free, and the child can withdraw it tax-free after age 59 and a half, or earlier for qualified expenses like a first home. Luna: But what if the child does not have earned income? Roth contributions normally require earned income to match. Does the 529 rollover bypass that? Lucas: Great question. Yes, the SECURE 2.0 provision explicitly waives the earned income requirement for the rollover amount. So even if the beneficiary is a full-time student with no job, you can still roll over up to the annual limit. However, if they have earned income from a part-time gig, they could also make a separate Roth contribution on top. Luna: That is a powerful combination. A student with a summer job could contribute their own $1,000 from earnings, and then receive the $7,000 rollover from the 529 — essentially funding a Roth with $8,000 in one year. Lucas: Exactly. But careful — the total contributions to any Roth IRA for that individual cannot exceed the annual limit. So if they contribute $1,000 from work, the rollover can only be up to $6,000, not $7,000. The sum of both cannot exceed the annual limit. Luna: Got it. So the rollover eats into the contribution room. Now, what about the 15-year rule? If the beneficiary is the original account owner — say, a parent started the 529 for themselves — does that count? Lucas: Yes, the 15-year clock starts from the account opening date, regardless of who the beneficiary is. So if a parent opened a 529 in 2010 for themselves, then changed the beneficiary to their child in 2025, the account has been open for 15 years — it qualifies. But only contributions that have been in the account for at least 5 years are eligible for rollover. Luna: That five-year holding period is key. So if you are planning to use this strategy, you need to stop adding new money to the 529 at least 5 years before you intend to start the rollover. Lucas: Precisely. That is a common pitfall. Another one: the rollover is only available per beneficiary, not per account. So if you have multiple 529 accounts for the same child, you still cannot exceed the $35,000 lifetime limit. Luna: And what about grandparents? Many grandparents open 529s for grandchildren. If the grandchild does not use all the funds, can the grandparent roll the leftover into their own Roth? Lucas: No. The rollover must go to the beneficiary, not the account owner. So the grandchild is the one who gets the Roth IRA. That can still be a great gift — essentially starting their retirement savings early. Luna: So if a grandparent has a 529 with $40,000 left for a grandchild who is now 22, they could roll over $7,000 a year to the grandchild's Roth. That is a nice head start. Lucas: It is. And it avoids the usual penalty on non-qualified withdrawals, which is 10% on earnings plus income tax. With the rollover, the earnings come out tax-free as long as they move to the Roth. Luna: But what if you need the money sooner? Say the child wants to buy a house at 30. Could they withdraw the rolled-over Roth contributions early? Lucas: Roth contributions can be withdrawn at any time tax- and penalty-free. The earnings inside the Roth are subject to the usual rules — you need to be 59 and a half for tax-free earnings, unless it is for a first home, up to $10,000. But the rolled-over amounts are considered contributions, so they are always accessible without penalty. Luna: That is a huge flexibility. So the 529 rollover effectively turns education savings into retirement savings or even a down payment fund. Lucas: Right. And it solves the old problem of overfunding a 529. People used to worry about saving too much for college. Now you have a back door to a Roth IRA. Luna: What about state tax implications? Some states offer a deduction for 529 contributions. Does a rollover trigger any state recapture? Lucas: That depends on the state. Many states do recapture the deduction if you take a non-qualified withdrawal. But the SECURE 2.0 rollover is classified as a qualified distribution at the federal level. States are starting to align, but not all. For example, New York and California have indicated they will treat it as a qualified distribution, so no recapture. But you should check your own state's rules. Luna: Important caveat. Also, the rollover is only available for 529 plans, not Coverdell ESAs or other education accounts. Lucas: Correct. And it only applies to 529 plans, not prepaid tuition plans. So if you have a prepaid plan, you would need to convert it to a 529 first, then wait the 15 years. Luna: That is a niche scenario, but good to know. Let's talk about timing. When in the year should you do the rollover? Lucas: You can do it anytime. But since it counts as a Roth contribution for the year, you need to make sure the beneficiary does not exceed the annual limit. So if they plan to contribute from their job, coordinate the timing. Many people do the rollover early in the year, then track their child's earnings. Luna: What about the 5-year aging rule on contributions? Does that apply to rollovers? Lucas: Yes. Contributions made to the 529 in the last 5 years are not eligible. So if you added $10,000 in 2024, you cannot roll that portion until 2029. But earlier contributions are fine. The plan administrator should track this for you. Luna: So the strategy for parents with a young child is to stop contributing to the 529 by the time the child is 13, if you want to maximize rollover flexibility later. Lucas: That is one approach. Or you could open a separate taxable account for the later years. But remember, the 15-year account age is from the opening date, not from when contributions started. So if you open the account when the child is born, by age 15 you can start rolling over — as long as contributions from the last 5 years are excluded. Luna: Let's say the child gets a full scholarship. The 529 might have $60,000 unused. Can you roll over the full $35,000 lifetime max and then withdraw the remaining $25,000 with a penalty? Lucas: Yes. But the earnings portion of the $25,000 withdrawal would be subject to income tax and a 10% penalty, unless it is covered by a scholarship exception. The scholarship exception allows penalty-free withdrawals up to the scholarship amount, but you still pay income tax on earnings. So it is better to roll over as much as possible. Luna: What about using the 529 for graduate school? If the child goes to law school later, the unused funds can be used for that. But if they decide not to, the rollover is still available. Lucas: Exactly. The rollover does not require that the child be done with education. It just requires the account to be 15 years old. So if they take a gap year, you could start rolling then, and later use remaining funds for grad school. But once you roll over, that money is in the Roth and cannot go back to the 529. Luna: So it is a one-way door. Plan carefully. One more thing — what happens if the beneficiary dies before using the Roth? Is the 529 rollover lost? Lucas: If the beneficiary dies, the Roth IRA passes to their beneficiaries, who can take distributions over their life expectancy. The 529 rollover is just a funding source for the Roth, so once it is in, it follows Roth inheritance rules. Luna: That gives some peace of mind. For many families, this rollover turns a potential tax headache into a powerful retirement tool. Lucas: It is one of those rare policy changes that actually simplifies planning. If you have an overfunded 529, or you are considering opening one, this is a reason to save more confidently. Luna: And a good reminder to check your account opening date and contribution history. The 15-year and 5-year rules are the gatekeepers. Lucas: Next episode we will look at how this rollover interacts with the new 'matching' Roth contributions from employers. That is another emerging trend. Luna: Looking forward to it. For now, if you have a 529 balance sitting unused, do not just cash it out. Consider the Roth rollover. Lucas: Exactly. And if this episode helped you see a new option, remember the link — buy me a coffee dot com slash fexingo. We will be back tomorrow.